Replacing older aircraft, ‘healthier’ airlines can raise additional funds

K Giriprakash Bengaluru | Updated on June 22, 2020

The vendors have started reducing supplies by one-third iStockphoto Dushlik

Spread from sale-cum-leaseback can be as high as $5 m for each new aircraft

With leasing rates at an all-time low, airlines might find it difficult to raise additional funds from leasing out their own aircraft. But industry watchers say that replacement of older aircraft with newer ones through the sale-cum-leaseback route can come to their rescue.

According to industry data, the monthly rate for leased aircraft has fallen as much as 26 per cent for the older versions of A320s and B777. However, through the sale-cum-leaseback route, airlines with healthy balance sheets such as IndiGo can hope to raise a higher amount.

At an investors call recently, IndiGo listed out three measures, which, when implemented, will result in an additional liquidity of ₹3,000-4,000 crore. These include reducing fixed costs which account for 40 per cent of total expenses and a 5-25 per cent salary cut. Further, to preserve cash, IndiGo will skip dividends this year and phase out older aircraft, which will help save ₹1,680 crore in supplementary rentals.

However, Leeham Company, an aviation consultancy firm, said lease rates are at an all-time low with the monthly lease rate of five-year-old aircraft plunging as much as 26 per cent.

Quoting UK advisory firm ISHKA, Leeham said since January, the Boeing 777-200F has lost only 2 per cent of its value, but lease rates dropped 11 per cent despite high demand for cargo aeroplanes now. The Airbus A350-900 lost 5 per cent of its value, but lease rates were down 17 per cent. A five-year-old Boeing 787-8, whose pricing was under pressure before Covid decimated the airline industry, can now be leased at $575,000/month, ISHKA said. The Airbus A320/321ceo and Boeing 737-800 also show sharp value and lease rate declines.

Access to cash

Rohit Beri, director, Aerospace, Defence & Security, Frost & Sullivan, told BusinessLine that airlines like Indigo which have a healthy balance sheet can benefit from replacement of older aircraft with the newer ones. “Through the sale-cum-leaseback route, they can strike a good bargain with the lessors giving them access to immediate cash, which they can use to sustain their operations. But the lessors will agree to work with them only when they know that these airlines are able to pay the rentals,” Beri said.

He pointed out that cost has always been an issue with the airlines, and those who can manage it will be able to sustain their operations for a longer time and will have better opportunities to strike deals which are beneficial to them.

Ashish Shah, an analyst at Centrum Broking, told BusinessLine that airlines which take delivery of new aircraft and straightaway enter into a sale-cum-lease-back deal with the lessors can make as much as $4 million to $ 5 million per aircraft. “Between what they buy for (from the manufacturer) and sell (to a lessor), there will be a spread, which can give them up to $5 million per aircraft,” he said. He pointed out that the market for aircraft like A 320 neos is witnessing limited supply, and hence, airlines can hope to earn substantial profit. “At the moment, the trend is to dump the older ones and replace them with newer ones which are cost-efficient and are low on maintenance.”

Published on June 19, 2020

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